This is to apprise you regarding the recent Maharashtra Advance Ruling in the case of Cummins India Limited, 2019-VIL-62-AAR. In this case, the Authority for Advance Ruling (‘AAR’) inter-alia held that the activity of allocation of expenses relating to common input services qualifies as ‘supply’ under GST law. Further, the AAR held that the taxpayer mandatorily needs to obtain Input Service Distributor (‘ISD’) registration for Head office (‘HO’) if it intends to distribute input tax credit (‘ITC’) on common input services. In the instant case, the Applicant obtained multiple registrations for its manufacturing units in different States which qualified as ‘distinct persons’ under the GST law. The Applicant’s HO in Pune received various input services which were common to all the units. The decision of the AAR was based on the following reasoning:
- The AAR placed reliance on Section 7 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) and Entry 2 of Schedule I of CGST Act to hold that allocation of cost by HO to units is a supply.
- In case ‘open market value’ and ‘value of supply of like kind and quality’ is not available, the Applicant should compute value basis the cost of provision of service. The AAR rejected the argument that in case of practical difficulty to compute value, any nominal value can be taken.
- HO should take registration as an Input Service Distributor (ISD) to distribute credit on common input services since ISD is compulsorily required to take separate registration under the GST law.
NITYA Comments: The AAR resonates the view that allocation of common expenses qualifies as a supply, the view which was also taken by AAR in the case of Columbia Asia Hospitals Private Limited, (refer to our update dated August 20, 2018) Interestingly, neither the Applicant nor the AAR considered the decisions pronounced under Service Tax law on similar issue that there is no supply between HO and units (as discussed in our update). In the context of ruling on valuation mechanism, the AAR did not consider the second proviso to Rule 28 of the Central Goods and Services Tax Rules, 2017 or gave any reason for non-applicability of the same. The second proviso states that where recipient can avail full credit, any value can be adopted for supply between distinct persons. Lastly, in respect of need of taking registration as ISD, the AAR incorrectly observes that the Applicant need to mandatorily take ISD registration where it wishes to distribute common credit. In fact, the question of the Applicant was whether it is required to distribute common credit once it is charging GST on cross charge amount. The CBIC itself has issued FAQ on Banking, Insurance and Stock Brokers Section wherein it clarified that HO has an option to either cross charge (allocation of expenses) the services or raise an ISD invoice. Thus, HO was not obligated to get itself registered as an ISD where it is doing cross charge.
In reference to our trailing update on the referred issue, we wish to update you that the Government has issued Notification No. 08/2019-Customs dated March 25, 2019 amending relevant Customs Notifications.
In light of above, the amended Notifications allow exemption from payment of Integrated Goods and Services Tax and Compensation Cess till March 31, 2020 for the following schemes:
- Advance Authorisation scheme;
- Export Oriented Unit scheme; and
- Export Promotion Capital Goods scheme